Another question from Corey:
Q: My question involves type of entity concerns for a real estate business. We have a Vacation rental that we rent out weekly. Because of the duration(7 days or less average) and our participation(active) I believe it classifies us as a trade or business. We currently are operating at a loss (before depreciation) but we are incrementally increasing the rental charge and getting new customers ( this is the beginning of the 2nd season)Hopefully we will have a least minimal profit next year(before depreciation). The question is what is the best entity for this real estate scenario operating as a trade or business. We did a 1031 exchange last year (jan 22) and currently operate as a sole proprietor in joint tenancy with my wife. We Have earned income from my occupation of around 270,000. This rental is in Maine and we live in Pa. Would a dual entity structure with a Nevada holding company for liability be the best?
A: This is a fairly complex question and I would recommend you go through it thoroughly with your Tax Coach. Let me give you some of the fundamentals, though. First, typically the best structure for a primary operating business is an S corporation. To get the best tax benefits out of your S corporation structure, you should review the details of your situation with your Tax Coach or, at a minimum, review the ProVision educational course, Making the Most of Your S Corporation, that is part of our "Business Tax Strategies Your Accountant Will Never Tell You" course at http://www.ProVisionWealth.com/products.
But even though you may want your business owned in an S corporation, you may not want the real estate used in the business to be owned by an S corporation. The reason for this is that if you ever want to distribute the real estate out of the S corporation (to refinance, for example), then the IRS will treat the distribution as a sale of the property from your S corporation to you at the then current fair market value. This creates what we call "phantom gain" where you end up with a tax on a non-cash transaction. Separating the business from the real estate is a little tricky, so definitely go through this in detail with your Tax Coach prior to making any changes.
You have yet another question in the mix regarding where the entity(ies) should be formed. I would suggest you speak to your asset protection attorney about that. Your attorney can look at the effects of the different laws in Pennsylvania and Maine to help you out. Please feel free to contact our office if you would like a recommendation for an attorney.
Warmest regards,
Tom